(Some Areas Of) the Market like Trump as President

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On Monday we wrote Wall Street wanted Hillary to be President…and that was clearly true at the beginning of the week through about 2:00 a.m. on Wednesday morning. As election results came in and states were being “called,” the Dow Jones Industrial (DOW) futures were down as much as -850 points in the overnight session as it became clear Donald Trump would become President of the United States. Members of The Joseph Group’s Investment Team were texting one another early into the morning hours filtering news of the election and headlines of “markets plunge” talking about potential actions we might take if markets did in fact go into free fall.

A few hours later, it became clear those concerns were unwarranted. Despite the big drop in the overnight session, the U.S. stock market had a positive open and the Dow went on to gain over 250 points on Wednesday, followed by a gain of over 200 more points on Thursday.

What we find interesting about the market action the last two days is that a rising tide is NOT lifting all boats. For example, while the Dow was up 200 points yesterday, the Nasdaq index (which has heavier exposure to technology stocks) was negative and the broader S&P 500 was essentially flat.

Two days do not make a market trend, but here are some of our key observations from actions in various areas of the market since Trump was named as President-elect:

Financials, Health Care, and Energy stocks are up. The gains in the Dow have not been broad based, but instead have been focused on a few sectors. Bank stocks, health care stocks, and big energy stocks have been among the biggest winners the last two days. Investors believe a “friendlier” regulatory environment under a Trump Administration will be supportive of these sectors.

Technology, Utility, and Consumer Staple stocks are down. Some of the biggest “losers” in the U.S. stock market have been big technology stocks, interest rate sensitive utility stocks, and consumer stocks. We believe some of the move is a reaction to higher interest rates and a selling of stocks deemed to be “defensive.”

Interest rates are up, bonds are down. On Tuesday, the interest rate on the 10-year Treasury bond was 1.82%. Yesterday, the 10-year Treasury rate was 2.12% – a huge jump of 0.30% in two days. Since bond prices move in the opposite direction of interest rates (think a teeter-totter with rates at one end and bond prices on the other), bonds have sold off and have given up a significant chunk of their gains for the year. We think there are a couple of factors at play here. First, the Trump agenda is expected to be stimulative for the economy and higher interest rates are saying the bond market is expecting higher future economic growth. Second, inflation expectations are picking up. In the last two days, the “breakeven inflation rate” which reflects the market’s expectations of future inflation has risen significantly. Rising inflation is something we are watching closely as it has significant implications for the asset allocation of portfolios we manage.

Foreign stock performance is mixed. Developed market foreign stocks are holding up better than Emerging Markets which is a reversal from earlier this year as emerging markets have been one of the best performing areas in the world. One of the things we are watching is the weakening of the Chinese yuan. Rhetoric of China being a “currency manipulator” is likely to pick up under a Trump administration and could have broader implications.

Gold and gold mining stocks are down. Some of the biggest corrections in the last two days have been in the area of gold and gold miners. Gold has been a strong performer overall in 2016, but the last two days have seen money come out of the gold market.

Commodities are down. Broader commodities such as oil, silver, wheat, and coffee are lower the last two days. Commodities are assets which tend to perform best in inflation environments so we are looking at this as a potential opportunity given rising inflation expectations in the marketplace.

Again, two days do not make for a trend but the world has definitely changed with Donald Trump being named President-elect. Big picture, we think Trump’s plans for stimulative economic policies call for an overweight to stocks versus bonds and we are looking at corrections in assets such as commodities and REITs as a potential long-term opportunity to hedge against the prospect of rising inflation.

Next week, our monthly Portfolios at Panera will be held on Thursday, November 17. We will be talking more about Trump administration policies and what it could mean for markets and portfolio positioning.